A version of this article originally appeared on Edelman.com
Within the next six weeks, the Canadian Securities Administrators (CSA) is expected to table for comment proposed changes to the rules governing unsolicited or hostile takeover bids. The new rules, first announced in September 2014, are intended to give the boards of target companies more time to respond to hostile bids by requiring that a bid remain open for at least 120 days (up from the current minimum of just 35 days).
This change is part of what has been described as a “rebalancing” of power in Canada between hostile bidders and the companies they target. It follows additional changes put forward by the CSA in 2013 that would provide boards with greater flexibility in using shareholder rights plans to defend against hostile bids.
Despite these proposed changes, Canadian companies are still more vulnerable to hostile takeovers than their U.S. counterparts, who have greater ability to reject unwanted overtures.
In Canada, a targeted company can use a rights plan, also known as a poison pill, to stall a bidder and buy time to identify a better alternative for its shareholders. Last year, Osisko Mining Corp. successfully fought off a $2.6 billion bid from Goldcorp after it was able to secure a competing offer that delivered far greater value, $3.9 billion. By comparison, the U.S. model defers to the business judgment of the target board and allows a poison pill to stay in place far longer.
Still, if a targeted Canadian company does not surface an alternative quickly, often within three months, a bidder will then apply to a provincial securities regulator to have the rights plan removed; this opens the door for shareholders to decide the fate of their company. Such was the case in 2013, when shareholders of Inmet Mining Corporation accepted First Quantum Minerals’ first and only unsolicited offer after the Inmet board was unable to surface a superior alternative after 90 days.
According to the 2014 Canadian Hostile Bid Study prepared by the law firm Blake, Cassels & Graydon LLP, companies targeted with a hostile bid in Canada remain independent only 22 percent of the time (based on a review of hostile transactions above $50 million from 2006 to 2013). The same study revealed that the initial bidder (as opposed to a white knight) is successful in acquiring the target roughly 50 percent of the time.
If you’re a Canadian public company concerned about a hostile bid, you won’t like those odds.
Even with the CSA’s proposed changes, Canadian public company boards need to be mindful of hostile bid risk and prepare accordingly. This includes ensuring that they have appropriate defensive measures in place, including an approved shareholder rights plan and a team of advisors that has a depth of hostile defense experience.
Communications can also play a critical role in enabling a targeted company to respond quickly and effectively to an unsolicited bid:
2014 saw the return of the hostile takeover bid in Canada, particularly in the mining industry. While the proposed changes by the CSA will make Canada less “bidder-friendly”, hostile takeover risk will remain a fact of life for many Canadian public companies. They need to plan accordingly, and shareholder communications needs to be an integral part of that process.
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